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Investing in Art and Collectibles

by Darwin on August 12, 2012

There is something about art that I just can’t describe. I hear the words “fine art” and think immediately to cigars and wines, golf and polo – old wealth “stuff” that is more than a way to cover a wall.

Art is a unique kind of investment. It never generates an income (unless you have enough to open a museum) but it can never go bust. At the worst, your Jackson Pollack can be turned into a nice pair of canvas slip-ons with $20 and a look in the phone book to find the last cobbler in town.

Art as an Asset Class

Like anything else, art prices go up and down, but over time, the finest of pieces have simply gone up. In recent years, new wealthy families in emerging markets (especially China) have driven prices through the roof. Then the financial crisis sucked everything out of the market. Now art is back – Sotheby’s just set a new record from a $119.9 million sale of “The Scream.”

As an investment, art requires more diversification. In many cases, it’s all about luck – just ask Herbert and Dorothy Vogel, a couple who built a massive art collection from up-and-coming artists in the 1960s from their incomes derived from postal work and library science.

Or how about the guy behind Loch-Dhu.com, a retailer for a whisky believed to be the worst-tasting in the world. He apparently stumbled on a collection of the world’s worst single malt whisky – and because it tastes horrendous, every collector wants it on their shelf. Be ready to pay up; a single bottle will set you back $335.

Being Smart when Investing in Art

There are a few ways to defend your wealth with art and collectables, however. It’s not all dumb luck!

Buy the best quality – Especially in downturns, quality is everything – and you never know when you might need to liquidate. The Wall Street Journal reported that dealers find it easier than ever to sell high-quality pieces, but lesser pieces are hardly moving at all. Analysts cite a slowdown in Asia, where buyers would purchase virtually everything 4-5 years ago but today want to only buy one or two pieces to fill out a collection.

Be ready for illiquidity – Rarity may give collectibles their value, but rarity makes them even more difficult to price. You should always expect that a piece will sell slowly, if at all, as the art market is very thin. Art and collectibles are a poor place to store cash that you might need in the next 5-10 years. If you need to liquidate quickly, every dealer and bidder will see the need, and refuse to give full market price. Transaction costs (specifically dealer and auction commissions) only make it more difficult to profitably sell a collectible quickly.

Get actual exposure – Some collectibles have very little actual collectible value. For example, old coinage values are often very dependent on the price of the underlying bullion. Commonly, collectors pay a multiple of the melt value, meaning that a gold doubloon might more closely track bullion prices than it does the typical level of inflation in collectible values.

Home runs are few – Collectibles should be seen as a way to preserve wealth over time. Few people will hit home runs by purchasing art from new and emerging artists in their area. No one will find a treasure trove of double struck pennies by filtering through a roll of coins. But plenty of people are buying art for wealth preservation for generations.

Realize that art is cash flow negative – Storage costs are very real. Bigger collections may require more insurance (easily added to a homeowners’ policy as a rider) or storage in a climate controlled unit like a safety deposit box at a nearby bank. Expect to expend cash while you own a collection and hope to make it up in the long run.

I’m a long ways from considering fine art as an investment.
We do have a fair bit of Persian and Middle Eastern carpets, which haven’t gone down in price since we bought them. One “fish design” Tabriz was a particularly good buy. Don’t know if you can consider carpets as art – maybe utilitarian art.